BRITISH GAS has fired the first salvo in what looks set to be a fierce energy price war. Its decision to reduce gas prices by 17 per cent and electricity tariffs by 11 per cent has already triggered a response from rival energy companies.

Gas and electricity prices at npower have been cut by 16 per cent and 3 per cent respectively, Powergen is cutting gas bills by 16 per cent and electricity bills by 5 per cent, while Scottish & Southern Energy (SSE) is lopping off 12 per cent from gas prices and 5 per cent off electricity.

However, hard-pressed consumers should not be rushing to congratulate the energy companies on their generosity, says Joe Malinowski, of TheEnergyShop.com, the price comparison website.

Mr Malinowski says that wholesale gas prices have tumbled by 63 per cent over the past nine months, while the biggest price cut on offer for consumers so far is only 17 per cent. Wholesale electricity price falls of 50 per cent have, likewise, not been matched by similar price reductions for consumers, with the largest so far being only 11 per cent.

Graham Kerr, of Energy-watch, the energy watchdog, says: “Although the prospect of a reduction in consumers’ bills is welcome, there is still a long way to go before the damage done to consumers by rocketing prices is undone. Energy companies have the scope to go a lot further with their price cuts.

“For example, npower has raised gas prices by 88 per cent in four years and is now cutting them by only 16 per cent.

“In any event, with the exception of SSE’s gas price reductions, these cuts do not come into effect immediately. British Gas’s 12 million customers have to wait until mid-March for the price cuts to kick in, while the 12 million customers with npower and Powergen have to hold on until the end of April.”

For the UK’s long-suffering energy consumers the price cuts come after four years of sustained rises, which have pushed up the average annual energy bill for gas customers from £318 to £615. Electricity customers, meanwhile, have suffered a rise of 54 per cent to £392. British Gas customers have fared even worse because the company was one of the most expensive suppliers. Before the price cut, British Gas customers were paying an average of £670 for gas and £419 for electricity.

But after the latest cuts have taken place British Gas will move upwards in the best-buy tables. Price comparison websites reckon that its customers will enjoy the fourth-cheapest standard gas bills, while its standard electricity bills will move from bottom to fifth among the six big suppliers. The company’s online Click Energy2 deals will, after a second cut, offer the cheapest gas and electricity in the entire market.

So where does this leave energy consumers? Are the price cuts announced so far a one-off move or the beginning of a sustained trend? Should they switch now to take advantage of the lower prices, or should they hold their fire until all the energy companies have declared their hands?

Mr Malinowski says: “We are at the start of a sustained fall in domestic energy bills, which will probably last between 12 and 18 months. We calculate that gas prices could fall by as much as 30 per cent over this period, with electricity prices coming down by between 20 per cent and 25 per cent.

“When seen in this context, the price cuts by British Gas are admirable, but they are only the start of the forthcoming price war.”

In view of these estimates, Mr Malinowski thinks that most energy customers can afford to sit tight for the time being. He says: “We expect the remaining suppliers to announce their own price cuts in the next few weeks, so there is a case for waiting and seeing how things pan out before rushing to switch.”

The one group of people who should be thinking of switching immediately are those who have signed up for a fixed-price deal. Anyone locked into such a deal will not benefit from the current round of price cuts and those on a fixed-rate contract could easily be paying £200 a year more than they need to, Mr Malinowski says.

Most of the fixed-price deals are from British Gas, though EDF Energy has a couple of fixed dual-fuel deals that now look poor value when compared with Click Energy2 or other online offerings. Customers on npower’s fixed gas contract would also be better off moving online.

For those on British Gas fixed deals the picture is more complicated. Mr Malinowski says that consumers on Price Freeze April 2007 and Price Protection April 2010 contracts would be no better off switching, but those on other deals could save money by moving. The exact best buy would depend on what region they were in.

Customers on Price Protection April 2009 are among those who would be better off switching now, even though this product was heavily promoted as a good deal last year. They will also be angry at being wrongly told, on British Gas’s own website, that they would have to pay a £50 fee for switching. British Gas has now said that there will be no switching penalty and has apologised for the error.

A spokeswoman for SwitchwithWhich, the energy switching website, says: “The latest price cuts by British Gas are very welcome and they put the company into a much more competitive position.

“However, there is still plenty that consumers can do to cut their energy bills. We estimate that households can save up to £500 a year by switching supplier.

“The average saving last year using SwitchwithWhich was £245. By far the biggest saving is achieved on the first switch, though subsequent switches can still be worthwhile.

“You can shave extra money off your bills by agreeing to pay your bills by direct debit rather than cheque and by going online, where some of the cheapest deals are to be found.”

CASE STUDY

PAINLESS SWITCH AND £140 TO THE GOOD

FIONA DEVINE made good use of her recent maternity leave by checking if she could cut her family’s energy bills by switching supplier.

Mrs Devine, of Preston, Lancashire, went to MoneySavingExpert.com to hunt for a better deal for heating and lighting the three-bedroom home she shares with husband, Matthew, and her children Harry, 2, and Sophie, 8 months. Through a link to uSwitch.com, the price comparison website, Mrs Devine, pictured with Harry and Sophie, discovered that she could save £140 a year by switching from a dual-fuel contract with EDF Energy to an online deal with npower.

Mrs Devine says: “It was surprisingly easy. I contacted npower, spent a bit of time on the phone to a bloke who took my details and it was all sorted out very rapidly.”

Go online for the biggest savings

THE increased energy consumption of owning a computer can be more than offset by the cheaper tariffs for online customers, Andrew Ellson writes.

British Gas, Powergen and npower have all announced price cuts this month, but existing customers on standard tariffs must wait weeks before the rates apply. New customers qualify for the better deals immediately.

Even after the standard tariffs fall, the online deals will still be cheaper. Mark Todd, of Energyhelpline.com, the comparison website, says: “British Gas’s online rates are about 30 per cent cheaper than its standard rates. After its standard tariff is cut on March 12 new customers will still find it is 15 per cent cheaper online.”

Energy companies offer cheaper deals online because web billing and direct debit payments mean that the accounts are cheaper to run. But Mr Todd says that the companies also use online tariffs to acquire new customers, adding: “The energy companies would prefer existing customers to stay on the standard rates.”

Three of the big five suppliers — British Gas, ScottishPower and Scottish and Southern Energy — allow existing customers to switch to online tariffs. EDF Energy and npower do not. If you are with either of these two and want a cheaper deal, you must switch supplier.